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Alternative Energy's Banner Year Ends with a Clang

posted on February 6, 2009


DENVER (AP) — As the United States became the world leader in wind power, venture capitalists poured money into alternative energy projects until the recession hit in October, drying up investments and stalling projects.

The quick turnaround shows how rapidly the global economy deteriorated and how fast money for alternative energy dried up.

Fourth-quarter venture capital investment totaled $954 million, down 44 percent from $1.7 billion invested in the third quarter of 2008, according to an analysis released Tuesday by Ernst & Young LLP. For the year, venture capital investment hit a record $4.7 billion.

There is a wide belief that the alternative energy will experience immense growth in the coming years, yet frozen credit markets and falling stock prices have been particularly harsh on the sector.

All eyes are on President Barack Obama and Congress where a $885 billion stimulus plan is before the Senate.

The outlines of that measure reflect a change in political priorities, with an emphasis on spending and tax breaks to encourage production of alternative energy sources and new efficiencies for buildings.

There is cautious optimism about how far the technology has advanced, but much of it is evolving or experimental.

"As a whole, the industry is still not generating cash flow so capital from investors is still a predominance of the funding mechanism for the industry," Ernst & Young clean technology analyst Joseph Muscat said. "That's venture capital, that's private equity, that's investors from the public equity markets, it's debt, the whole thing."

Some companies are especially sensitive to the economic downturn because they do not have a sustained, healthy internal cash flow.

While alternative energy remains a small fraction of all power used, wind and solar are among the fastest growing in the United States.

The U.S. has become tops in the world in wind power installations, the Brussels-based Global Wind Energy Council reported Monday. The nation added 8,358 megawatts in 2008 to put total capacity at 25,170 megawatts. Germany has 23,902 megawatts of capacity.

The industry is closely tied to venture capital, however.

Venture capital investment has grown steadily since 2002 when just 43 U.S. clean energy companies raised $234 million. Investment has increased at a compound annual growth rate of 65 percent through the $4.7 billion invested in 171 companies in 2008.

When that outside funding dries up the industry is vulnerable, and not just in the United States.

A recent report by London-based consulting firm New Energy Finance, which found overall global investment in clean energy dropped sharply in the second half to $155 billion for the year, but for the year was up 4.4 percent from $148 billion from 2007. Venture capital investment was about $3.9 billion of the total.

Ethan Zindler, who heads the North American research arm of New Energy, said it's difficult to say which companies will recover more quickly given the unique circumstances in each country.

In the United States, much will depend on how Congress structures its economic stimulus package. Proposals include $14.4 billion for government energy efficiency and renewable energy programs, $4.5 billion for a smart electricity grid; $2.9 billion to weatherize modest-income homes and a tax credit extension for renewable energy production.

"We're in an interesting situation where I think a lot of the industry right now is literally in a wait and see mode," Zindler said. "Some of the biggest questions should be answered fairly quickly if they move at the speed that they've been promising."

During the fourth quarter, the U.S. electricity generation segment, led by solar companies, received $539 million, or 57 percent of all capital invested, Ernst & Young said.

Alternative fuels garnered $236 million, or about 24 percent of the quarter's total capital, the report showed. Biofuels raised $140 million and the natural gas segment raised $96 million.

That industry has been hit by a series of bankruptcies as the market became saturated, including VeraSun Energy Corp., the nation's second largest ethanol producer.

About $68 million, or 7 percent, was invested in energy efficiency.


Tags: alternative energy biofuels ethanol news solar wind wind power